Economies should worry about harm posed by cartels

Asia Development Bank consultant Dr Andrew SimpSOns shares his views on the conduct of cartels and how they can cause economic harm. Business reporter Peter Esila reports.

CARTEL conduct is highly likely to cause economic harm, says Dr Andrew Simpsons, a consultant from the Asian Development Bank. He said cartel conduct was often seen as the most-adverse type of anti-competitive conduct. Simpsons is a barrister with Terrace Chambers based in Wellington, New Zealand. He is the founder of Certari Consulting Ltd. Simpsons’ works involves advising governments on competition law and policy, regulatory matters, providing institutional support to regulators in their effort to enforce competition law, and assisting businesses to comply with competition law. He spoke during the Independent Consumer and Competition Commission (ICCC) hosted seminar in Port Moresby yesterday to commemorate World Competition Day. “Overall loss may be worse than, for example, overall loss from theft and fraud,” Simpsons said. “International cartels can have an adverse effect on developing economies. “Cartel conduct is an agreement by competitors, or likely competitors, to coordinate their prices or output in order to increase their collective profit. “The main types of cartel conduct includes bid-rigging, cover pricing, boycott, market sharing, allocating customers and limiting production or supply.” Simpsons said the ICCC Act now prohibited price fixing and exclusionary provisions. He cited the 2006 case of an International air cargo cartel. “In June 2006, competition authorities simultaneously raided airline offices in the United States and Europe, in order to investigate claims that many major airlines had colluded in the setting of their fuel and security surcharges,” Simpsons said. “German carrier Lufthansa informed authorities of the illegal agreements and were granted immunity from prosecution. “Competition regulators around the world took action against various airlines in Europe, the United States, Korea, Australia, New Zealand, Canada, and India. “Penalties imposed have exceeded one-and-a-half billion US dollars and several airline executives have faced jail terms. “In addition, several airlines have faced class actions and have had to compensate customers for hundreds of millions of dollars. “In Australia, the ACCC pursued 15 local, European and Asian-based airlines for price fixing in the Australian air cargo market. “Federal Court penalties totaling $111.5 million (K368mil) included a $20 million (K66mil) penalty against Qantas, $5 million (K16.5mil) against British Airways, $5.5 million (K18.17mil) against each of Japan Airlines and Korean Airlines, and $15 million (K50mil) against Air New Zealand (in 2018).” Simpsons said overcharges were the main form of economic harm. He said Cartels are harmful because consumers lost as a result of their withdrawal from the market due to an unacceptable high price. “They are forced to give up consumption of the cartelised product and to use their income on an inferior substitute if one exists,” Simpsons said. “For producers, the reduction in industry output means operating at sub-optimal levels or exiting the industry. “Some labour and plant resources will not be used.” Simpsons said market forces were unlikely to prevent cartel conduct typically because cartels acted in secrecies and were difficult to detect. “Cartelists have strong incentive to cheat, but cheating may not happen or be widespread enough to destabilise cartels,” he said, “In the enforcement implications, the global trend is to prohibit cartel conduct and to treat cartels as an enforcement priority. “Some countries, for example US, Canada, Australia, UK have cartel offences punishable by jail.” Simpsons said some of the exemptions from cartel prohibitions would include authorisation by ICCC, which was possible but costly and time-consuming. “Other exemptions include related corporations, joint ventures and collaborative ventures, supply/acquisition agreements between competitors and collective bargaining,” he said. Simpsons told the seminar that investigating cartel conduct was about a leniency policy. “The ICCC Leniency Policy is a major initiative, follows approach taken in many other countries to offer a strong incentive to corporations and individuals to report cartel conduct to the commission,” he said. “This means that if someone in the group of cartel organisation decides to report their cartel activity to the authorities, that person will not be prosecuted. “The commission, for that matter, will be lenient on that person. “Cooperation from leniency applicants has cracked more cartels than all other tools. “It has led to detection and dismantling of the large global cartels and record-breaking fines in the US, EU, Canada, Australia and elsewhere. “Some conditions may be worth tightening up, like the need to limit immunity to first to report. “Immunity should always be conditional on ongoing cooperation” “Corporate immunity will confer immunity on employees as well, making employees subject to agreement to cooperate. “Immunity needs to be distinguished clearly from cooperation: cooperation is to be taken into account when assessing penalty, a separate cooperation policy should complement the Leniency Policy. “Cartel conduct is subject to various sanctions and remedies under ICCC Act, including pecuniary penalties, injunctions and banning orders (for individuals) “Pecuniary penalties are low: the maximum corporate penalty should be increased to K20 million and alternative maximum penalty of double the gain or double the loss likely to be caused by a breach. “ICCC Act (s 93) should be amended to make it clear that a court may require a defendant to take specified precautions against repetition of a breach of the ICCC Act (Consumer and Competition Framework Review [2017]) “A power should be given to the ICCC to accept undertakings in relation to alleged breaches of ICCC Act and to apply to court to enforce the undertaking if the party fails to honor it (CCFR). “The ban on indemnifying individuals for pecuniary penalties imposed (now limited to price fixing) should be extended to apply in relation to any breach of ICCC Act (CCFR). “Admissions of fact in litigation by the ICCC, or agreed by a party in a settlement with the ICCC, should be admissible as evidence in private actions for damages (CCFR). “ICCC does not have explicit power to bring actions for damages on behalf of victims: recommendation that ICCC have that power (CCFR): Limitation period of three years, recommendation that period be extended to 6 years (CCFR).” Simpsons said ICCC must promote:

awareness of anti-cartel law and encourage development and use of compliance programmes that are likely to include clearly-stated compliance policies that are reinforced by top as well as middle-level management;

systematic identification and management of risks created by the company’s operations;

clear allocation of responsibility for compliance functions to specified personnel;